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Would Managers Sacrifice Conservative Financial Reporting to Meet/Beat Market Earnings Expectations?

Author

Listed:
  • Anthony C. Ng

    (Faculty of Business and Economics, The University of Melbourne, Parkville, VIC 3010, Australia)

  • Hua Christine Xin

    (Mitchell College of Business, University of South Alabama, Mobile, AL 36688, USA)

  • Bikki Jaggi

    (Rutgers Business School, Rutgers University, Newark, NJ 07102, USA)

Abstract

Prior studies show that engaging in conservative financial reporting (CON) positively affects earnings quality. However, managers also manage earnings to meet/beat market earnings expectations (MBME). This study asks three questions regarding the earnings that MBME. First, it investigates whether managers are willing to sacrifice CON when adopting strategies to MBME. Second, it tests whether managers prefer to use other earnings management (EM) strategies to MBME instead of sacrificing CON. Third, it tests whether information asymmetry between managers and shareholders affects managers’ decisions to sacrifice CON. Results show that managers are more likely to sacrifice CON to MBME but are less likely to do so if they can manage earnings using accrual-based or real EM. Also, managers are more likely to do so when information asymmetry with shareholders is higher. These findings contribute to the literature by examining the circumstances in which managers would sacrifice CON to MBME.

Suggested Citation

  • Anthony C. Ng & Hua Christine Xin & Bikki Jaggi, 2024. "Would Managers Sacrifice Conservative Financial Reporting to Meet/Beat Market Earnings Expectations?," JRFM, MDPI, vol. 17(7), pages 1-33, July.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:7:p:280-:d:1428507
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    References listed on IDEAS

    as
    1. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    2. George W. Ruch & Gary Taylor, 2015. "Accounting conservatism: A review of the literature," Journal of Accounting Literature, Emerald Group Publishing Limited, vol. 34(1), pages 17-38, February.
    3. Jeong†Bon Kim & Liandong Zhang, 2016. "Accounting Conservatism and Stock Price Crash Risk: Firm†level Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 412-441, March.
    4. Adut, Davit & Duru, Augustine & Galpin, Wendy Liu, 2011. "The role of corporate governance in meeting or beating analysts' forecast," Journal of Accounting and Public Policy, Elsevier, vol. 30(2), pages 188-198, March.
    5. Warfield, Terry D. & Wild, John J. & Wild, Kenneth L., 1995. "Managerial ownership, accounting choices, and informativeness of earnings," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 61-91, July.
    Full references (including those not matched with items on IDEAS)

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